Course Title
INSURANCE APPROACHES : INDEX
BASED WEATHER INSURANCE
SHADRECK MAPFUMO
VICE PRESIDENT,CROP INSURANCE
MICRO INSURANCE AGENCY HOLDINGS, LLC
3rd AFRICAN MICROFINANCE CONFERENCE
KAMPALA
Course Title
Malawi Project Partners
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CRMG- WORLD BANK (Certain Slides )
MRFC
OIBM
NASFAM
Malawi MET
IRI, Columbia University
PRESENTATION OVERVIEW
Course Title
 Context
 How
to Develop a Micro Level Weather Risk
Management Program
 Timeline.
 Key
Hurdles
 Conclusion
Course Title
CONTEXT
RISKS IN AGRICULTURE
Weather Related:
 Drought
 Flood
 Frost
 Hail
 Cyclone
Course Title
Non Weather Related:
 Displacement
 Civil Strife
 Economic Decline
 Price Collapse
 Pests
Insurance only covers causes captured by index
Course Title
HOW FARMERS COPE WITH DROUGHT RISK
•
Minimize investment: local seeds, little/no fertilizer
•
Cover ground with straw to protect humidity (coffee)
•
Irrigate
•
Diversify: Plant Cassava as “drought insurance”
•
Accumulate livestock as “bank” for times of stress
Food emergency
camps
1 in 20
years
(unpredictable) Food
aid – some migration
Insurance
Intervention
Soil (+asset)
depletion
Normal Yield
Extra yield
Frequency
1 in 7
1 in 4
1 in 2
1 in 4
Course Title
TRADITIONAL VS. INDEX- BASED INSURANCE
Multi-peril Crop
Insurance
 High Administrative
Costs
 Moral Hazard
 Adverse Selection
Index-Based Weather
Insurance
 Use weather
parameteras a proxy for
damage
 Objective triggers and
structured rules for
payouts
 Improved correlation
between need and
provision
CHALLENGE
Course Title
Design an alternative, efficient and costeffective crop failure insurance program
that can be easily reinsured and
distributed to individual farmers: small,
medium and large.
DEVELOPING A PROGRAM
Course Title
Identify significant farmer exposure to
weather
Quantify the impact of adverse weather on
their revenues
Structure a contract that pays out when
adverse weather occurs
Execute contract in optimal form to reinsure
the risk in the international markets
DEVELOPING A PROGRAM
I.
Identify significant farmer
exposure to weather
II.
Quantify the impact of adverse
weather on their revenues
III.
Structure a contract that pays
out when adverse weather occurs
IV.
Execute contract in optimal form
to reinsure the risk in the
international markets
Course Title
I.IDENTIFY THE RISK
Course Title
Location:
 Which regions are at risk to weather?
º
What are the weighting for each region’s contribution to risk?
Period:
 What is the critical period?
º
Monthly, seasonal, annual, multi-year?
Index:
 What weather measurement is the most accurate proxy for
exposure?
º
º
º
º
º
Temperature, Rainfall, Snow, Frost etc.
Average, Minimum, Maximum
Cumulative
Event
Combination or compound or several factors
CROP SENSITIVITY TO WEATHER
*Maize yields are particularly sensitive to
rainfall during the tasseling stage and the yield
formation stage – rainfall during the latter
phase determines the size of the maize grain
2%
2%
2%
2% 13% 13% 13% 13% 13% 13% 13% 1%
1%
x Cumulative Rainfall in each decade = Maize Rainfall Index
Weights and diagram taken from the FAO’s maize water requirement report*
Course Title
DEVELOPING A PROGRAM
I.
Identify significant farmer
exposure to weather
II.
Quantify the impact of adverse
weather on their revenues
III.
Structure a contract that pays
out when adverse weather occurs
IV.
Execute contract in optimal form
to reinsure the risk in the
international markets
Course Title
II.QUANTIFY THE EXPOSURE
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Unit Exposure:
 What is the farmer’s weather exposure per unit of the
defined index?
º
º
What is the yield volume lost per unit index?
 Best year/worst year analysis, yield regression etc.
What is the $ value lost per unit index?
 Expected market value, input/production costs
Limit:
 What is the total amount of protection required per risk
period?
º
º
This may be the starting point for determining the total sum
insured
What are the objectives of the pilot program?
DEVELOPING A PROGRAM
I.
Identify significant farmer
exposure to weather
II.
Quantify the impact of adverse
weather on their revenues
III.
Structure a contract that pays
out when adverse weather occurs
IV.
Execute contract in optimal form
to reinsure the risk in the
international markets
Course Title
IIIa. STRUCTURE
A PROGRAM
III. STRUCTURE
THE PRODUCT
Course Title
Type:
 Insurance at what level?
º
º
º
Farmer stand-alone insurance products
Weather-indexed loans or credit
Crop Loan Portfolio Insurance
Retention:
 Define the trigger index level where weather protection
begins
º
º
How much risk does the farmer want to retain?
Key to pricing and transfer
Premium:
 How much can a farmers afford ?
 Payment terms for coverage (upfront, periodic etc.)
 Subsidised by lenders or government?
Course Title
A Standardized Approach To:
Contract
RECOMMENDED APPROACH TO CONTRACT DESIGN
Design
Balance simplicity that farmers and stakeholders can
understand, with the complex dynamics that
characterize water stress impact on crop yields:
 Easy to communicate to farmers and stakeholders
 Performs well from agro-meteorological perspective
 Provides required protection for all stakeholders at
an affordable level
 Captures local conditions and environment
 Simple to replicate to other locations and crops so
that programs are scalable
 Local ownership, so programs are sustainable
Course Title
EXAMPLE: LILONGWE CONTRACT, MAIZE
30 days
130mm
58 MKW/mm
5800 MKW
Deficit Rainfall (mm) 
Phase 3:
Trigger Level:
Payout per mm:
Maximum Payout:
40 days
25mm
1160 MKW/mm
5800 MKW
Payout ($) 
Phase 2:
Trigger Level:
Payout per mm:
Maximum Payout:
Payout ($) 
50 days
40mm
580 MKW/mm
5800 MKW
Payout ($) 
Phase 1:
Trigger Level:
Payout per mm:
Maximum Payout:
Deficit Rainfall (mm) 
Deficit Rainfall (mm) 
PHASE 1
PHASE 2
PHASE 3
Sowing & Establishment
Growth & Flowering
Yield Formation to Harvest
Sowing Window &
Dynamic Start Date
10th November – 10 January:
25 mm in 10 days
Cropping Calendar 
Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts)
DEVELOPING A PROGRAM
I.
Identify significant farmer
exposure to weather
II.
Quantify the impact of adverse
weather on their revenues
III.
Structure a contract that pays
out when adverse weather occurs
IV.
Execute contract in optimal form
to reinsure the risk in the
international markets
Course Title
Course Title
A Standardized Approach To:
A
STANDARDIZED
APPROACH
:
IMPLEMENTATION
Program Implementation
Data
International
In-Country
Data
Reinsurance Company
Reinsurance treaty
Insurance
Company/Association
Bulk weather insurance contract
Met Office
Data
Product Retailer:
Bank/MFI/Cooperative/Input Supplier
(Bundled) weather insurance contract
Data
Farmer/Farmer
Groups
 Clear, well-defined responsibilities, product accounting practices and
communication between all in-country stakeholders
Course Title
TIMELINE
? months
3 months
X months
PRODUCT
DESIGN
PRODUCT
MARKETING
PROTECTION
PERIOD
•Farmer Interviews
•Distribution Partners
•Interviews with
specialists.
•Product Education
•Interviews with key
stakeholders.
•Data Procurement
•Index Design
• Product concept testing
• Product documentation
•Product Feedback
•Weather Markets
•Product Execution
•Daily Monitoring
1 month
SETTLEMENT
•Settlement Calculation
•Claims Paid
KEY HURDLES
Course Title
 Weather
infrastructure.
 Basis Risk or “How good is this insurance?”


Mismatch between coverage and actual result
How can it be minimised?
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 Data




Write contracts on stations near farmers
Clever structuring
Community-level risk pooling?
Protection against catastrophic events
Satellite data – NDVI, derived precipitation?
or “Can we reinsure the risk?”
Length of historical record - 30 years or more?
Quality controlled, cleaned, enhanced?
Reliable ongoing collection and reporting procedures?
Third-party settlement data e.g. UKMO?
CONCLUSION
Course Title
Weather insurance is not a panacea :
 It can only enhance existing agricultural supply chains and
businesses, not create them
 It can help support expansion in rural finance and agriculture
 But must go hand in hand with investment in extension
services, irrigation, strengthening of input and output markets
etc.
Course Title
THANK YOU !